P 28

II MONEY MARKET
 Money Market
Money market is a market that deals in
borrowing and lending of short term funds.
It deals in short term financial assets and debt
Definition of Money Market
instruments which can be easily converted into
cash. So liquidity is very high in this market. “a market for short term financial
These assets are near substitute for money. assets that are close substitutes for
The major players are banks, financial
institutions, mutual funds and other companies.
money and facilitate the exchange of
RBI, DFHI etc play a major role in this market. money in primary and secondary
Normally the maturity period of the assets market”. (RBI)
extends from few days to a maximum period of less
than one year.
 It supports other markets such as foreign “It is a market that deals in various
exchange, capital market and government securities
market
grades of near money” (Crowther)
 Features of Money Market
 No geographical limitations as it extends all over the world and the transactions
can take place online
 It is a wholesale market for short term debt instruments
 It relates to all dealing in money or monetary assets
 The market purely specializes in short term funds
 The market is no homogenous as it consists of various segments and sub markets
which are different to each other
 The market facilitates very close link between RBI and other banks and helps
implementation of monetary policy
 There is no fixed place for this market as transactions can be routed through
cyberspace
 The transactions can be done directly by the participants or through
intermediaries
 The maturity date of the instruments are 365 days and less.
 Objectives of Money Market

Facilitate investment of temporary surplus funds

People and organizations having surplus funds can invest the funds in
those channels where the return is very high
Short deficit of funds can be met easily by banks and other corporate enterprises

The banks and corporate entities can easily borrow funds whenever they need short
term funds.
Central bank can control liquidity and cost of funds in the market easily
with the help of money market
The central bank can implement monetary policy measures so that liquidity of
funds can be adjusted to manage the cost of funds.
 PROMISSORY NOTE

A promissory note is essentially a written promise to

pay someone. This type of document is common in
financial services and is something you've likely
signed in the past if you've taken out any kind of loan.

Stamp and
signature
 BILL OF EXCHANGE

Your Picture Here And Send To Back

 CHEQUE

Your Picture Here And Send To Back

Money Market Instruments

Commercial Papers (CP)

Certificate of Deposit (CD)

Treasury Bills (T-Bills)

Commercial Bills

Call Money

Repurchase Agreements (Repos)

 1. Commercial Papers (CP)

Commercial Paper or CP is defined as a short-term, unsecured money market instrument, issued as a

CP
promissory note by big corporations having excellent credit ratings. As the instrument is not backed by
collateral, only large firms with considerable financial strength are authorized to issue the instrument.
FEATURES
 CP is a short term money market instrument comprising of promissory note with
fixed maturity
 Only highly rated companies (CRISIL P2) are permitted to issue CPs. Manufacturing
companies, Leasing and Finance Companies, and Mutual Funds are the major issuers of
CP in Indian money market.
 It is a certificate evidencing an unsecured corporate debt of short term maturity. The
period of maturity ranges from 7 days to one year.
 CP is issued at discount on face value but it can also be issued in interest bearing
format
The instrument is negotiable by endorsement and delivery
 The issuer of CP promises to pay some fixed amount to the buyer on some future
date without pledging any assets.
 The minimum size of the issue is Rs.5 lakhs and its multiples
ADVANTAGES OF CP
1. The issue of commercial paper is very simple and very less documentations are
needed in between the issuer and the investor (buyer).
2. The instrument is highly flexible as the maturity date can be fixed by the company
according as the availability of cash flow
3. Corporate companies get direct access to institutional investors. Hence it is called as
Direct Paper in money market
4. It is an attractive source of funds for working capital as the cost of fund is relatively
very low
5. The investors (buyers) can get high rate of return as compared to the deposits given
to the bank for short period of time.
 2. Certificate of Deposit (CDs)

CD is a negotiable money market instrument issued at discount in

demat form for funds deposited at banks or with other financial
institutions for a specified period of time.
(This means that the banks borrow from the market by issuing certificate in demat form at
discount). Suppose a bank is issuing CD for Rs.5 lakhs. This means that the investor pays an
amount to the bank and the bank issues a certificate for Rs. 5 Lakhs in demat form. It is
issued at discount which means that the investor has to pay lesser amount than the face
value of the CD. If the face value of the CD is Rs. 5 lakhs and discount offered by the bank is
10%, the investor needs to pay only Rs.4,50,000. So the investor has given Rs.4,50,000 and at
the time of maturity within one year, the investor will get Rs. 5 lakhs.
A selective list of commercial banks and financial institutions have been authorised by the Reserve bank of India (RBI)
to issue Certificates of Deposits. Rural regional banks and co-operative banks cannot issue CDs.
Individuals, companies, corporations, etc. are eligible depositors for Certificates of Deposits. Non Resident Indians (NRI)
can also be issued CDs on a non-repatriable basis.
The minimum amount that has to be deposited in a Certificate of Deposit is Rs. 1 lakh.
The tenure for Certificates of Deposit issued by commercial banks varies between 7 days and 1 year. The maturity term
for CDs issued by financial institutions varies from 1 year to 3 years.
Dematerialised or electronically generated certificates can be transferred by delivery or endorsement, while those in
demat forms can be transferred as per the guidelines set for demat securities.
Authorised banks and financial institutions cannot grant loans to depositors against Certificates of Deposits as these
money market instruments are not accompanied by a lock-in period. The invested amount cannot be retrieved before
the completion of the pre-decided maturity tenure.
 Advantages of CDs

 Certificates of Deposits are a comparatively safer investment

instrument than other investments like shares and bonds. The price of
shares and bonds will change.
It is highly liquid as it can be transferred from one person to the other
by endorsement and delivery.
 It is an ideal investment option for organizations that have got
surplus funds.
It offers higher interest rate than savings bank deposits to the investor

CD is a negotiable money market instrument issued at discount in demat form by banks and other
financial institutions that are permitted by RBI. It is similar to the deposits given to a bank, but the
major difference is that the deposits are not negotiable whereas CDs are negotiable by endorsement
and delivery.
We Create Portfolio Presentation

Quality Simple Portfolio

Professional Presentation
PPT
Presentation You can simply impress your
audience and add a unique
zing and appeal to your
Presentations. Get a modern
PowerPoint Presentation that
is beautifully designed. Easy
to change colors, photos and
Text. I hope and I believe that
this Template will your Time,
Money and Reputation. Easy
to change colors, photos and
Text.
 3. Treasury Bills (T-Bills)

T-Bills are short term promissory notes issued by RBI on behalf of Central Government to
borrow money to meet budget deficit. These documents are issued at a discount for a
period of 91 days, 182 days and 364 days. The investor gets return on the difference
between purchase price and face value of the T-Bill.

For example, suppose RBI declares the sale of T-Bills with a face value of Rs.10,000 for a period of 91 days at a
discount of 10%. This means that people having money can purchase that document for Rs.9000 (10% less on face
value of Rs.10,000) and after 91 days, the buyer will get Rs.10,000. The difference amount which is Rs.1000 is the
income to the investor for keeping that money in T Bills for 91 days.
 TREASURY BILLS
Features of Treasury Bills

1. Treasury bills are issued by RBI on behalf of the central government.

2. The period of the bills are 91 days, 182 days and 364 days
3. The bills are issued at discount through auction conducted by RBI
4. The participants are RBI, commercial banks, state governments, financial institutions, provident
fund department, corporate firms, foreign banks, public etc
5. Risk of investment is zero as it is issued on behalf of the government and is supported by the
government.
6. These documents are negotiable instruments
7. Treasury bills are available for a minimum amount of Rs.25000 and multiples of Rs.25000.
 TREASURY BILLS
Advantages of T Bills

1. T bills are risk free investment as it is issued by RBI and backed by the Government
2. It is used as a tools by Central Bank to generate liquidity in the market and thereby influence
the market rate of interest.
3. It offers short term investment opportunities where the rate of returns is relatively high
4. The T-Bills are highly liquid as there exists a secondary market for it where it can be negotiated
5. The transaction cost of Treasury Bills are very less
6. No tax will be deducted from the maturity value which is given to the investor
7. Commercial banks can maintain SLR and CRR by using T-Bills
 IV. Commercial Bills

Commercial bills are bills of exchange that is used for trade transactions.
Content Here
 IV. Commercial Bills
Features of Bill of Exchange
An instrument which a creditor (seller) draws upon to his debtor
(buyer)
It carries an absolute order to pay a specified sum.
The sum is payable to the person whose name is mentioned in the bill
or to any other person, or the order of the drawer, or to the bearer of
the instrument. Content Here

It requires to be stamped, duly signed by the maker and accepted by

the drawee.
It contains the date by which the sum should be paid to the creditor.
 Commercial Bills
Suppose Mr. A places an order for purchase of goods worth Rs. 100,000. Mr.
A is in Kochi and Mr.B is in Kolkotta. The payment will be made by Mr.B
when the goods reaches Kolkotta. There is a payment risk for Mr.A that if B
rejects the items, A may find it difficult to sell that items to somebody else.
Another risk is that if B fails to make payment, on the basis which legal
document, Mr. A can file a case. So before manufacturing and sending the
goods, Mr.A prepares a legal document
Content Here
which is called as a bill of exchange.
So bill of exchange is a document raised by the creditor (seller) instructing
the debtor (buyer) to pay a specific amount of money either to Mr. A or
anybody whose name is mentioned in the document or anybody to whom
the document is transferred.
 Commercial Bills
Suppose Mr. A places an order for purchase of goods worth Rs. 100,000. Mr. A is in Kochi and Mr.B is in Kolkotta. The
payment will be made by Mr.B when the goods reaches Kolkotta. There is a payment risk for Mr.A that if B rejects the
items, A may find it difficult to sell that items to somebody else. Another risk is that if B fails to make payment, on the
basis which legal document, Mr. A can file a case. So before manufacturing and sending the goods, Mr.A prepares a
legal document which is called as a bill of exchange.
A B

Seller Buyer
Content Here
 V. Call/Notice Money (Money at Call & Short Notice

Call money market is a market where short term surplus funds of

commercial banks and other financial institutions are traded. The
participants usually borrow and lend money for a period of minimum one
day to a maximum of 14 days. The funds are borrowed by banks that need
funds, brokers and dealers in stock market. The funds are lend by banks
having surplus funds ,. Thus the market facilitate as an equilibrating
mechanism for evening out short term surpluses and deficits
 Features of Call Money Market
1. It is a market for lending and borrowing short term funds that ranges from minimum one day to a
maximum of 14 days
2. The amount lend will beHere
Content called back any time in between one day to fourteen days (so it is repayable
onYoudemand)
can simply impress your audience and
add a unique zing.
3. The banks and other financial institutions are the major lenders who supply their surplus funds in the
market and the major borrowers are banks who face shortage of funds, brokers and dealers in share
market Content Here Content Here
You can simply impress your audience and You can simply impress your audience and
4. The rate of interest depends upon
add a unique the level of demand and supply
zing. and
add a unique zing.it is controlled by RBI
5. The market is highly liquid and constitute major part of the transactions in the money market
6. If it is lend for a single day, it is called as call money or overnight money and if it is for a period of
more than one day but less than 14 days, it called as notice money or money at short notice.

7. The market is controlled by Reserve Bank of India (RBI)

 Operation in Call Market
1. The lenders and borrowers in a call market contact each other over telephone. So it is basically an
over-the-telephone market. After negotiations, the lender and borrower arrive at an agreement that
specify the loan amount and the rate of interest. The borrower issues cheque and call money
Content Here
borrowing receipt
You can simply impress yourto the and
audience lender. When loan is paid with interest, the lender returns the duly
add a unique zing.
discharged receipt. Instead of negotiating directly, the lender and the borrower deal through DFHI
(Discount and Finance House of India).
Content Here Content Here
You can simply impress your audience and You can simply impress your audience and
add a unique zing. add a unique zing.
 Advantages of Call Money
Drawbacks of the market

1. High Liquidity
2. High Profitability as the rate of interest
charged on the money is very high 1. Uneven development as the market is not
3. Helps banks to maintain SLR and CRR uniform throughout the country
4. It is very safe for the lender and relatively 2. The call market in different centers are
the fund is cheaper for the borrower not integrated
5. The market trend provides indication to 3. High volatility in interests rates
RBI related to the demand and supply of
funds so that appropriate monetary policy
measures can be taken
 VI. Repos
Repos is the sale of securities with an
agreement by the seller to buy back the
securities on a future date at a pre-
determined rate.
It is a secured short term loan in which the
shares and securities are the collaterals
Operations
The party who sells securities is the
borrower and the party who buys
securities is the lender. The collateral
security in the form of SGL (Subsidiary
General Ledger) is transferred from the
borrower to the lender through RBI
account. Only RBI approved securities
such as Central and State Government
bonds, Treasury Bills, Corporate Bonds etc
are used as securities.
The rates charged for the transaction is
called as repo rate
 Reverse Repo
Reverse Repo is the mirror image of the
Repo. The operation explained in repo is
reversed. Here, the lender purchases the
securities with the guarantee that it will
be resold in a future date. The rates
charged on this operation is called as
reverse repo rate.
Types of Repos
In India there are two types of repos. They
are (i) Market Repos and (ii) RBI Repos
Market Repo is an operation in which the
lender and the borrower are banks
RBI Repos is an operation in which the
transactions are between RBI and other
banks. RBI undertakes repo and reverse
repo operation as a part of Open Market
Operation (OMO)
 Need and Relevance of Repo and Reverse Repo

The repo operations enable commercial banks to borrow from RBI by offering
collaterals such as Government bonds, state government bonds etc. So it is
easier for banks to borrow fro RBI and pay it back on a specified future date at a
particular rate of interest. The rate charged by RBI to commercial banks are
called as Repo Rate
Similarly, when commercial banks have surplus funds, they can lend it RBI by
accepting securities under reverse repo agreements. The interest rate charged
by the commercial banks on RBI is called as reverse repo rate
 ADVANTAGES OF REPO AND REVERSE REPO

1.Repos are collateral short term borrowings backed by

securities and hence it is safe and risk free
2.For the lender, it is a profitable investment for a customized
period of time
3.Central bank can use repo as an integral part of the
monetary policy measures
4.It enables the banks to adjust their CRR and SLR easily
 Characteristics of Indian Money Market
1.Dichotemic Structure
The Indian Money Market consists of
organized sector and unorganized sector.
The organized sector consists of RBI,
Commercial Banks, Insurance companies,
Unit Trust of India, Industrial Finance
Corporation and State Finance Corporations.
The unorganized sector consists of
indigenous bankers , chit funds, village
money lenders, chit fund etc.
Many efforts are undertaken by RBI to bring
the unorganized sector under control but so
far it has not been very effective.
2. Seasonality
The demand for money in Indian Money Market is
seasonal.
During the busy season , ie October to April, the
demand for money is high due to high demand in
agricultural activities.
But April onwards, the demand decreases.
Based on the level of demand, the rate of interest
also changes from time to time.
RBI has been taking steps to balance the rate of
interest by controlling the supply of funds in the
market throughout the year
 Characteristics of Indian Money Market

3.Multiplicity of Rate of Interest 4.Lack of Organized Bill Market

There exists wide diversity in the money rate of
interest in the money market. Since the market is The commercial bills market in the country is not
not integrated throughout the country, there is much developed. The market for Government and
immobility of funds in the market from one Semi-Government securities are very narrow. The
geographical area to another and from one market for treasury bills is not developed much.
segment to another. This causes different rates The investors in government securities are limited
of interest in the country as well as in different
to institutional investors such as RBI, LIC etc.
segments of the market. Despite the efforts to
change the rate of interest through changes in
bank rate, the rate of interest widely fluctuate in
between different regions of the country.
 Characteristics of Indian Money Market
5. Absence of Integration
The Indian money market was divided into
several sections with each section being loosely
connected with one another. There is no
integration between the organized banking
system and unorganized banking system in the
country. Gradually the conditions have been
improving due to the efforts undertaken by RBI
and passing of Banking Regulation Act of 1949.
6. Limited Instruments
The number of instruments traded in the market is
very less and inadequate when considering the
increasing requirement of short term funds. There
should be wide range of instruments to meet the
varied requirement of borrowers and lenders in
the market
 Characteristics of Indian Money Market

7. No Contact with Foreign Money Markets

The Indian money market is an insulated market
with little contact with foreign money markets. In
the Western Countries and in the US, there is
large movement of capital . But Indian money
market fails to attract funds from these market.
8. Limited Secondary Market
The secondary market is limited in the case of
money market instruments. The activities are
limited to rediscounting commercial bills and
treasury bills. In India people resorts to bank
overdraft and loans with lesser reliance on money
market instruments.

9. Limited Participants

The participants in Indian Money Market are limited. There are various
regulations for the entry of participants in the market. There are large number
of borrowers but limited number of lenders in the market.
 Components of money market (P41)

Weakness of Indian Money Market (P42).

Role of RBI in Indian Money Market (Liquidity Adjustment Facility (LAF) which is Repo and Reverse Repo
and write also in detail about monetary policy)
 Difference Between Money Market and Capital Market (P44-45)
Basis Money Market Capital Market
Objective Arranging short term funds (< 1 Year) Long term funds > 1 Year
Instruments Short term instruments Eg. T Bills, Repos, CP, CD etc Long term instruments such as bonds,
debenture, equity etc

Regulators Central Bank, ie RBI SEBI, MoF, Govt of India

Institutions Central Banks, Banks, FI, Primary Dealers Mutual Funds, Investment Cos, Brokers etc

Safety High Safety, Less Risk, Guaranteed High Risk, High Return, Less Safe
Liquidity of Instruments Highly Liquid No so liquid
Trading Place No special place, no trading floor, transactions through Formal place of business like stock
phone exchange

Secondary Market Trading No active secondary market Very active secondary market

Speculation No speculation. Institutional market High speculation

Accessibility Less accessible to individual investors. Institutional High accessibility to individual investors
investment market

Nature Supplies fund for working capital requirements Supplies funds for fixed capital
requirements
 SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

 SEBI is the statutory authority to deal with all matters relating to capital market in India
 It is the only regulatory authority to regulate the share market in India
It has got the responsibility to safeguard the interest of all the investors in the country in capital market.
SEBI was set up in 1988 as an administrative body to control and regulate the activities of the tock
exchange, stock brokers and to protect the interest of the investors.
 It was given legal status by passing a bill in the parliament in the year 1999.
 After the economic liberalization in the year 1991, the new issue market expanded in the country with
regards to the amount of issue, conversion of debentures, new methods of issue which led to the increasing
role of SEBI in managing the capital market in the country.
 Rationale for Setting Up of SEBI

 With the growth of securities market, the number of malpractices also increased in the primary and
secondary market in India. The following were the major malpractices that happened in the market were:
1. Fragmented regulation and multiplicity of administration
2. Primary markets were very important and its development was poor
3. Non-disclosure of proper information in the prospectus by companies
4. Delay in settlement as there was delay in delivery of shares and collection of payment
5. Delay in listing even after the time period given for listing after the IPO
6. The companies used to divert the funds collected through IPO for different purposes
7. Giving false financial results by companies to misguide the investors
8. Spreading false news by companies to influence the share prices
9. Price rigging in which three or parties purchase and sell shares in bulk to increase the prices of shares
10. Heavy insider trading through the network of brokers.
11. Stock exchange was run as brokers club as the management was in the hands of brokers
12. The merchant bankers and other intermediaries were not controlled and regulated
13. Mutual funds were not properly regulated and controlled
14. Poor disclosure of mutual funs
 OBJECTIVES OF SEBI

1. To protect the interest of the investors

2. To promote the development of securities market
3. To regulate and control the securities market
4. Any other matters connected with the above activities
 POWERS OF SEBI (P47)
1. Make rules, guidelines, regulations and circulars for the systematic and disciplined growth of the
securities market.
2. Issue proper instructions to the investors so that proper care can be taken by them in making
investment in the market
3. Regulate the various intermediaries who are functioning in the share market
4. Cancel or suspend the registration of various intermediaries such as brokers, dealers etc
5. Regulate capital issue by providing guidelines to companies that enter the new issue market
6. Grand approval to stock exchanges and renew their registrations
7. Consider appeals against listing refusals
8. Issue directives to the stock exchanges, frame the by-laws, verify listing agreements and manage the
administration of these activities
9. Oversee the audit of the stock exchanges
10.Control and check fraudulent investment in shares and securities
11.Prohibit companies from issuing prospectus, offer documents and advertisement who violate the rules
and regulations
 POWERS OF SEBI (P47)
12. Regulate the content and disclosures in the prospectus
13. Specify form and content of the prospectus
14. Grant incorporation of companies
15.Conduct inspection on company’s affairs
16.Investigate fraudulent transactions in securities and violation of intermediaries
17. Suspend trading of any security, restrain people from trading etc
18. Call for information from undertaking inspection, conducting inquires and audit of
stock exchanges, mutual funds and other persons associated with the securities market
19. Call for record and information from any banks, any other authority , boards or
corporations established by central government, state government or provincial
government in respect of any transactions in securities.
20.Performing such functions and exercising powers granted under the Securities
Contracts (Regulation Act of 1956.
21. Levying fees or other charges for carrying out the aforesaid functions
(Management of SEBI P. 48)